CNC 501(c)(3) Governance & Bylaws 3 — Questions and Answers
Question 1: Which document takes legal precedence when a nonprofit's bylaws conflict with its Articles of Incorporation?
- The bylaws, because they are more detailed
- The Articles of Incorporation, because they are the foundational governing document (Correct answer)
- The most recently adopted document always prevails
- The conflict must be resolved by a board vote
Correct answer: The Articles of Incorporation, because they are the foundational governing document
Articles of Incorporation are the primary legal document filed with the state, and they take precedence over bylaws in cases of conflict.
Question 2: A nonprofit board member who learns of a pending real estate deal involving the organization and wants to purchase the property personally is most likely violating:
- The duty of care
- The duty of obedience
- The duty of loyalty (Correct answer)
- The IRS private foundation rules
Correct answer: The duty of loyalty
Using confidential organizational information for personal financial gain violates the duty of loyalty, which prohibits self-dealing and conflicts of interest.
Question 3: What is the primary purpose of an indemnification clause in nonprofit bylaws?
- To protect the organization from IRS audits
- To shield board members from personal liability for actions taken in good faith on behalf of the organization (Correct answer)
- To ensure the CEO cannot be terminated without cause
- To limit the organization's fundraising activities
Correct answer: To shield board members from personal liability for actions taken in good faith on behalf of the organization
Indemnification provisions protect board members and officers from personal financial liability for decisions made in good faith while acting on behalf of the organization.
Question 4: Under what circumstances may a 501(c)(3) organization engage in lobbying activities?
- Never; all lobbying is strictly prohibited
- Only through a separate for-profit subsidiary
- To an insubstantial extent without jeopardizing tax-exempt status (Correct answer)
- Only if approved by the IRS on a case-by-case basis
Correct answer: To an insubstantial extent without jeopardizing tax-exempt status
Public charities may engage in a limited, insubstantial amount of lobbying (attempting to influence legislation) without losing 501(c)(3) status.
Question 5: Which of the following best describes 'staggered terms' for board members?
- All board members serve the same fixed term and are replaced simultaneously
- Board members are recruited from different geographic regions
- Board terms are arranged so only a portion of the board is up for election each year (Correct answer)
- Terms are extended automatically unless a member requests otherwise
Correct answer: Board terms are arranged so only a portion of the board is up for election each year
Staggered terms (also called classified boards) ensure continuity of governance by rotating which members' terms expire, so institutional knowledge is preserved.
Question 6: A 501(c)(3) organization's Form 990 is considered:
- Confidential and available only to the IRS
- A public document that must be made available upon request (Correct answer)
- Private but shared with major donors upon request
- Confidential except for the balance sheet section
Correct answer: A public document that must be made available upon request
Form 990 is a public document; nonprofits must make their three most recent 990s available for public inspection upon request.
Question 7: What is the significance of having a 'conflict of interest policy' in nonprofit governance?
- It prevents board members from serving on multiple nonprofit boards simultaneously
- It ensures board members disclose and recuse themselves from decisions where they have a personal interest (Correct answer)
- It prohibits any transactions between the nonprofit and for-profit businesses
- It requires annual financial audits by a certified public accountant
Correct answer: It ensures board members disclose and recuse themselves from decisions where they have a personal interest
A conflict of interest policy requires board members and officers to disclose personal interests that could influence their decisions and to recuse themselves from related votes.
CNC 501(c)(3) Governance & Bylaws 3
Which document takes legal precedence when a nonprofit's bylaws conflict with its Articles of Incorporation?